SAN FRANCISCO - San Francisco plans to refund its outstanding Ambac AssuranceCorp.-insured convention center debt next month in a deal that will complete the city's efforts to repair its variable-rate portfolio.
The city, California's fourth-largest, plans to sell up to $147 million of variable-rate demand obligations through the City and County of San Francisco Finance Corp. in early September to refund $144.3 million of lease-backed bonds sold to finance the expansion of the George R. Moscone Convention Center in 2000.
Interest rates on the 2000 Series 1, 2, and 3 bonds have surged since Ambac lost its triple-A ratings from the three major credit rating agencies earlier this year.
"We have seen a real spike," said Nadia Sesay, director of the Mayor's Office of Public Finance. Rates on the debt, which is in weekly mode, jumped to a high of 7.5% at the July 3 remarketing, she said. That's more than three times the average of 2.3% over the past eight years.
San Francisco refinanced its only other variable-rate issue last month when it refunded $118 million of general obligation bonds issued for reconstruction of the Laguna Honda Hospital in 2005. The city replaced the MBIA Insurance Corp.-backed debt with uninsured fixed-rate bonds.
The city also owns several business enterprises, including the San Francisco International Airport, which manages its own debt and has been a more active issuer of variable-rate bonds. The airport restructured more than $1 billion of variable-rate debt earlier this year after the auction-rate securities market collapsed. That process is completed - assuming paper insured by Financial Security Assurance Holdings Ltd. and Assured Guaranty Ltd. remain palatable to investors.
Officials decided to continue with variable-rate debt in the upcoming convention center refunding despite continued uncertainty about the variable-rate market and steep costs for letters of credit.
"Being in variable-rate mode has proved to be favorable to the city," said Sesay. San Francisco has saved $41 million on the convention debt, compared to the rate it would have expected if it had issued fixed-rate bonds back in 2000, she said.
The outstanding VRDOs are unhedged, so the city wasn't forced to stay in VRDOs by unaffordable swap termination fees.
San Francisco will pay 75 basis points a year for the LOCs it's buying from Bank of America NA and State Street Bank and Trust Co. It secured a three-year commitment from each bank.
Sesay said officials compared the likely interest rates on variable-rate debt, including the higher LOC costs, to both current market rates for fixed-rate bonds and to the city convention center's outstanding variable-rate debt. The scenarios showed the government saving 200 to 400 basis points by issuing variable-rate bonds.
"It was cheaper to pay the 75 basis points," she said. "We will break even within a couple of months," recouping both issuance costs, and then accrue savings over the rest of the bonds' 23-year life.
San Francisco financial adviser Gary Kitahata, of Kitahata & Co. in San Francisco, said he approached several banks to discuss the possibility of issuing a request for proposals for letters of credit. However, banks told him that wouldn't be practical or quick in the current market, where issuers are competing for credit enhancement and liquidity and banks are overwhelmed by requests.
Banks issued a record $40.5 billion in letters of credit in the first half of the year as issuers rushed to refinance auction-rate securities, according to data from Thomson Reuters. That's a 437% increase from the first half of 2007.
"The banks all told me that they're dealing first with their current clients and if you're not a current client, it will take months to get to you," Kitahata said.
San Francisco needed to get the refunding to market as soon as possible because of the recent spike in interest rates, he said. That need to refinance "expeditiously" and the reaction of other banks convinced the city to focus its LOC search more narrowly than normal.
"We had a couple of letter of credit banks that already knew the city and its credit," Kitahata said.
San Francisco has a standby bond purchase agreement with State Street, as the liquidity provider for its outstanding convention center VRDOs. The city has several outstanding business relationships with Bank of America, including Banc of America Securities LLC's role as a remarketing agent and underwriter on forthcoming deal.
De La Rosa & Co. is the other remarketing agent and underwriter on the new debt. The city chose the firm and Banc of America to underwrite and remarket the new VRDOs because they were the two best performers among the three banks that remarket the old convention center debt, Sesay said in testimony before the San Francisco Board of Supervisors.
The city dropped JPMorgan from the deal because it performed worst in remarketing the existing debt. The bank also refused to provide a LOC on the new deal.